The Federal Reserve and Treasury have been getting very cozy over the past year or so. But the Fed hasn't become so enamored with Geithner Inc. that it's willing to comply with its every whim. That's clear from today's news. Bloomberg reports that the Fed rejected a request from the Treasury to undergo a sort of audit -- a public review of the central bank's structure and governance. This probably shouldn't be surprising, but might intensify the calls of its critics in Congress for greater transparency.
First, here's some detail from Bloomberg:
The Obama administration proposed on June 17 a financial-regulatory overhaul including a "comprehensive review" of the Fed's "ability to accomplish its existing and proposed functions" and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and "a wide range of external experts."
Some top central bank officials, after agreeing to the review, saw a potential threat to Fed independence after the Treasury released the proposal, two of the people said. The Obama plan said the Treasury would consider recommendations from the review and "propose any changes to the Fed's governance and structure."
Let's face it: the Fed likes its secrecy. About a month ago, I wrote a post about the struggle I have with the Fed's opaqueness. I get that some of its actions are best kept quiet, so not to increase public panic or encourage shareholders to dump stock. Still, as a quasi-public entity, it's hard to understand how it's completely immune to strict oversight. Naturally, if it saw this request as jeopardizing its independence, then it would balk.
The Bloomberg piece continues quoting a source who casts doubt on whether the Treasury has any business asking the Fed for clarity anyway:
"It is not obvious at all why that is a Treasury responsibility or even appropriate why the Treasury would undertake that kind of study," said Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey, and a former Atlanta Fed research director. "The Fed was created by Congress and it is not part of the executive branch."
But that's fine -- Congress is getting involved too. As I also noted back in July, some of its members are pushing to create greater transparency, and specifically, a Congressional audit. The charge is being led by ever-vocal Federal Reserve critic Rep. Ron Paul. (R-TX). He has sponsored a bill calling for the audit and has a few hundred co-sponsors. Although it's unclear if the bill will actually pass, the Fed would have to comply. Unlike the Treasury request, this time the Fed couldn't just smile, shake its head and walk away.
Will the Fed's decision to ignore the Treasury's request hamper their ability to work together? I doubt it. It shouldn't be forgotten that Treasury Secretary Timothy Geithner is a former Fed banker himself -- having run the New York Federal Reserve Bank prior to joining Team Obama. In fact, I wouldn't be surprised if Geithner had no illusions that the Fed would rebuff the Treasury's request. After all, as a former Fed banker, he should know better than to think the Fed would greet a voluntary audit with open arms.